Stumpage Appraisal Formulae. 2>79 



margin over the cost of operation as an insurance against the 

 many minor hazards inherent in the logging business. In the 

 first case above described the return on the capital was ample, 

 but the margin over the operating costs was so ridiculously 

 small that no sane logger would attempt the job since the 

 least accident such as a period of bad weather might easily 

 wipe out all profits. In the second case the margin on the 

 operating cost was ample but the return on the money in- 

 vested was insufficient to interest capital. Obviously both de- 

 mands must be met. Neither formula alone can measure both. 

 The investment method, of course, defines absolutely the return 

 to the invested capital, while the operating cost method is an 

 excellent measure of the margin necessary above the cost of 

 operation. Therefore, both should be used, constituting a double 

 minimum. Thus used, the range of percentages in each may be 

 kept reasonably low. With the percentages standardized, the 

 formula which gives the lower profit must govern. 



This simultaneous use of the two methods brings in question 

 at once the advisability of including interest as a cost in the 

 operating cost method. This practice, which has become al- 

 most universal since its adoption in the Forester's formula, has 

 something in its favor where the investment method is not 

 used as a check. To include interest makes a formula which 

 is in a sense a hybrid between the two methods. Extra profit is 

 allowed in the form of interest for extra invested capital not 

 fairly represented in the operating cost. This compensation is, 

 however, only partial since the interest rate is invariably (and 

 necessarily) low, say 6 per cent, as compared with the profit 

 rate. Further, its inclusion tends to confuse the results. Neither 

 the margin over the real operating costs nor the return on the 

 investment is shown. 



The profit allowed consists of three factors: i. A percent on 

 the operating costs (which may be earned several times a year). 

 2. A per cent, per annum of a part of the invested capital, 

 (usually only the fixed investment), and, 3. A per cent (profit) 

 on this last percentage since the latter is carried as a cost item. 

 And these three factors are so confused that analysis is dif- 

 ficult. 



When both formulae are used, the interest charge should 



